Valero Energy Corporation — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone fourth-quarter filing; quarterly Q4 figures are included below where reported. Amounts are U.S. dollars.
Business context
Valero operates 15 refineries in the U.S., Canada and U.K. with approximately 3.145 million barrels per day of throughput capacity, 14 ethanol plants with 1.73 billion gallons of annual capacity, and related logistics and marketing operations. At year-end, segments were refining, ethanol and Valero Energy Partners LP (VLP). On January 10, 2019, Valero acquired the remaining publicly held VLP units for approximately $950 million in cash.
Financial results and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $117.0 billion | $94.0 billion |
| Operating income | $4.572 billion | $3.563 billion |
| Net income attributable to Valero stockholders | $3.122 billion | $4.065 billion |
| Diluted EPS | $7.29 | $9.16 |
| Cash from operating activities | $4.371 billion | $5.482 billion |
| Dividends per common share | $3.20 | $2.80 |
- Revenue rose about 25%, largely reflecting higher refined-product prices; higher crude and feedstock costs offset much of the increase. Operating income increased about $1.0 billion.
- Net income fell despite stronger operating income because 2017 included a $1.9 billion tax benefit from U.S. Tax Reform. Management reported adjusted net income of $3.157 billion in 2018 versus $2.203 billion in 2017, a non-GAAP comparison.
- Refining segment margin was $10.956 billion, up $1.164 billion; adjusted refining operating income rose $961 million to $4.994 billion. Distillate margins, crude discounts and lower biofuel-credit costs helped; weaker gasoline margins offset some gains. Refinery throughput averaged 2.986 million barrels per day.
- Ethanol operating income declined to $82 million from $172 million as lower ethanol prices and higher corn costs outweighed higher co-product prices and production. Production averaged 4.109 million gallons per day.
- Operating cash flow declined by $1.111 billion, including a $1.297 billion working-capital outflow in 2018 versus a $1.289 billion inflow in 2017. Investing cash outflow was $3.928 billion and financing cash outflow was $3.168 billion.
- Year-end cash and equivalents were $2.982 billion, including $235 million held by VIEs and restricted to their use. Reported total liquidity was $7.097 billion, comprising $2.747 billion of available cash and $4.350 billion of available borrowing capacity.
- Total assets were $50.155 billion. Debt and capital lease obligations totaled $9.109 billion, including $238 million current and $8.871 billion long-term. Senior unsecured debt ratings were investment grade.
- Valero spent $1.7 billion on share repurchases and paid $1.4 billion in common dividends during 2018. Fourth-quarter purchases under announced programs totaled 7.44 million shares at an average $81.77 per share.
Fourth-quarter results
For the quarter ended December 31, 2018, revenue was $28.730 billion, operating income $1.299 billion, net income attributable to Valero stockholders $952 million, and diluted EPS $2.24. In Q4 2017, the corresponding amounts were $26.392 billion, $843 million, $2.371 billion and $5.42. The unusually high prior-year Q4 earnings included the $1.9 billion Tax Reform benefit; the filing does not provide a directly comparable quarterly adjusted earnings figure in the supplied text.
Outlook, material events and risks
- Management expected first-quarter 2019 refining and ethanol margins to remain near then-current levels. It expected sour-crude discounts to remain weaker than five-year averages, while inland sweet-crude discounts could remain wide due to production growth and pipeline constraints.
- Capital investments were estimated at approximately $2.5 billion in each of 2019 and 2020, about 60% sustaining and 40% growth. These estimates exclude strategic acquisitions and specified capital spending at certain VIEs.
- Valero completed the $468 million Peru acquisition and acquired three ethanol plants for $320 million during 2018. It also recorded a $170 million biodiesel blender’s tax credit benefit in 2018 for volumes blended in 2017.
- Other 2018 items included a $108 million environmental reserve adjustment for certain non-operating sites, $17 million of Texas City refinery fire expenses, and a $38 million charge related to early redemption of $750 million of senior notes.
- Environmental-compliance capital spending was $270 million in 2018; management estimated $170 million for 2019 and $15 million for 2020, subject to regulatory and other changes. The filing identifies environmental liabilities, Renewable Fuel Standard/RIN costs, volatile refining margins and crude supply/differentials as risks. It also discusses severe weather, refinery outages, transportation disruption, cybersecurity and regulatory change.
- Management said a no-deal Brexit could disrupt imports of materials used by the Pembroke refinery, but did not expect Brexit to have a material overall impact. The ultimate effect remained uncertain.
- Environmental enforcement matters were ongoing, including alleged violations at several facilities. Valero stated it was working with regulators and believed the disclosed proceedings would not materially affect its financial position, results or liquidity if decided adversely. A separate Hartford, Illinois cleanup liability remains subject to uncertainty; the company is pursuing contribution from other potentially responsible parties.
- The company reported no off-balance-sheet arrangements. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Most important facts for investors to verify
- Whether refining margins, crude discounts and product-market spreads can sustain the 2018 improvement, particularly amid weaker gasoline margins.
- How working-capital requirements, cash generation and planned capital spending affect liquidity, debt and shareholder distributions.
- The normalized earnings impact of the 2017 Tax Reform benefit and 2018 one-time or unusual items, using reconciliations of the company’s non-GAAP measures.
- The financial and reporting effects of the January 2019 VLP merger, including the cash consideration, debt guarantee and revised segment presentation.
- Exposure to RIN and other environmental-credit prices, regulatory costs, cleanup obligations, and the status and potential cost of disclosed enforcement matters.
- Execution and returns on growth projects and acquisitions, and the effect of the 2019–2020 capital-investment program.